THE UNIVERSAL ECONOMY UNIT XVI: THE MISLEADING USE OF TRADITIONAL ACCOUNTING/ECONOMIC TERMINOLOGY
The U.S. Government never – ever – borrows money. The U.S. Government is never – ever – in debt.
Ah, the heresy! How can one make such a ridiculous statement! Look at the National Debt Clock! It’s the end of the world! We’re mortgaging our great, great, great, great grandchildren into infinity! China will own us! It’s the end of the world!!!! Be afraid! Be very afraid! And on and on the insanity goes.
But let us ask ourselves – – – since the U.S. Government is the Constitutionally authorized creator of the nation’s money, why on Earth would it ever borrow money to fund its own operation? Let us ask ourselves – – – if the U.S. Government is the Constitutionally authorized creator of the nation’s money, why would it ever go into debt rather than simply create the money needed to fund its ongoing operation? The answers are – – – the U.S. Government wouldn’t and doesn’t “borrow” money, and it wouldn’t and doesn’t go into debt.
The terms “borrowing,” “debt,” and “deficit” are completely misleading when applied to the U.S. Federal Government. However, the formal economics profession, out of the inertia of tradition and the typical lack of understanding in any profession of how the professional use of terminology is misunderstood and misinterpreted by laypeople, continues to inappropriately apply these terms.
Let us try to understand. Through the U.S. Treasury and U.S. Federal Reserve Bank (the Fed), the U.S. Government creates the nation’s money and injects or spends it into the economy. It pays for the military and the wars. It pays for Medicare and social security. It pays for interstate highways, airports, seaports and other infrastructure. It pays for the space program and all of the publicly funded satellites that provide the Global Positioning Systems allowing “Google Maps” to function in our cell phones. It funds our national parks. It pays for disaster relief for fires and hurricanes. It provides endless goods and services of which we are largely unaware. In the end, government money creation also provides the funds that allow business to function and each of us to receive a paycheck.
When we receive our paychecks most of us necessarily spend most of it for normal living expenses. At this point in history we Americans, directly or indirectly, purchase more products from China than the Chinese purchase from us. As such, China has our dollars – which were created by the U.S. Government in the first place – and we have China’s products. It is a free exchange and all parties are happy or they wouldn’t do it. We have the products we want and China has dollars to purchase anything they want that can be purchased in dollars.
China currently has more dollars than it wishes to spend. A lot of dollars – – – 1.15 trillion dollars. Like any sensible person or financial organization, China doesn’t hide its $1.15 trillion under the mattress. It looks for a safe place to open a savings account. And where is the safest place on Earth to open a savings account? The U.S. Treasury. China now has a $1.15 trillion savings account with the U.S. Treasury. It is here where we get into trouble with the traditional use of professional economics terminology.
Immediately the economists (and the fear mongering, corporately “elected” politicians), wittingly or unwittingly spread the alarm. “The U.S. Government has “borrowed” $1.15 trillion from China!” “We are in “debt” to China for $1.15 trillion!” “China will own us!” But perhaps we should rephrase this.
The excess $1.15 trillion China possesses is part of the money the U.S. Treasury created and spent into the economy in the first place. U.S. citizens received this money in their paychecks and spent it on Chinese products. China doesn’t need to spend the money right now so the U.S. Treasury and the Fed are nice enough to allow China to open a savings account by purchasing U.S. Treasuries. The U.S. Government is not “borrowing” this money from China. It doesn’t need China’s money. The U.S. Government created China’s dollars to begin with. And the U.S. Government isn’t “in debt” to China in the layman’s sense of the term. Any time China wants its money the Treasury gives it back.
Now, everyone is happy. China has a safe, low interest-bearing savings account and the U.S. Treasury enters the figure of $1.15 trillion in China’s computer screen ledger. If China decides it wants to spend the money, the Treasury removes the $1.15 trillion from their computer screen, creates the money needed to pay the interest, and enters the $1.15 trillion plus interest figure in China’s computer screen checking account at the Fed. China can go by whatever it wants – in dollars.
China, of course, is just one example of how the misused terms of so-called U.S. “borrowing,” “debt” and “deficit” are used to deliberately mislead and alarm for political/financial manipulation. By creating irrational fear in the American public, these terms can be used to impose austerity. The citizenry can be convinced that “government spending is out of control” and is “indebting their grandchildren,” social spending for the common good can be slashed, and the rich can “privatize” all things public.